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Aereo, amid challenges, looks ahead to possibilities

Aereo founder and CEO Chet Kanojia is all about pleasing his customers. That's what he told FierceOnlineVideo in a recent interview.

"The significance is to the consumer. I can't reiterate that importance enough. The end beneficiary in this whole thing is the consumer," said Kanojia when asked about the significance of his fledgling service to cable operators and the online video industry.

Kanojia's statement is not surprising. Any cable, online video or telecom provider would say the same--though it might not always feel that way to consumers. The recent Time Warner Cable-CBS dispute has left approximately 3 million subscribers in New York, Los Angeles and Dallas without CBS stations since Aug. 2. Meanwhile, Aereo has been taking concrete steps to show that it does, in fact, care about its subscribers.

Of course, Aereo has a very large incentive to treat its customers well and listen to their feedback. The fledgling service, built from scratch, is working to garner as many subscribers as possible and facing a lot of competition while doing so.

For example, the service, which lets users rent remote antennas to stream over-the-air broadcast channels, recently changed its pricing to an exclusively monthly model due to customer demand for a simpler structure, said Kanojia. Aereo also offers a free trial month of service, helping it compete against cablecos that offer discounted, but not free, promotions for the first few months of service.

Overall price might be one of the main reasons Aereo is an attractive service for some. For $8 monthly, subscribers can rent an antenna and have access to 20 hours of cloud-based DVR storage; for $12, they receive an additional 40 hours of storage. Though Time Warner Cable (NYSE: TWC) offers a much more programming--more than 200 channels--for $50, consumers who are only interested in over-the-air programming may feel Aereo is a better choice.

Kanojia says cable operators overcharge their customers for certain channels--he cited ESPN specifically--which are lucrative but which not all viewers are interested in.

"There is a wide imbalance in terms of what is sold to consumers… versus what they are using," he adds. "They are increasingly subsidizing things they don't care about."

The Aereo founder acknowledges the challenges his business faces, though, and says he knows they won't go away anytime soon. One of the biggest obstacles to Aereo's continued rollout is its ongoing disputes with broadcasters, notably Fox, CBS (NYSE: CBS) and NBC, over its legality.

In April, Fox's Chase Carey suggested his company might be willing to transform itself into a pay channel if Aereo continues to go unchecked. Around the same time, CBS President Les Moonves told the New York Times that the company had talked to cablecos about moving its flagship station to an exclusively cable distribution model.

Kanojia won't predict whether he expects further legal challenges--the online video service plans to launch in 22 new markets by the end of 2013, with recently-announced start dates in Miami, Houston and Dallas-Ft. Worth--but will only say that Aereo is "a very thoughtfully prepared company with a commitment to see through any [further challenges]."

If broadcasters continue to sue, though, Aereo has a few significant advantages. First, the Second Circuit Court of appeals has already rejected an injunction request from 17 broadcasters to shut down the service, although the broadcasters have since appealed.

Second, it's unlikely either Fox or CBS would dare to make the move to an exclusively paid model, given the amount of backlash they would face from consumers and content partners.

Mostly importantly, however, may be the fact that Aereo's legal arguments are not so different from the ones those same broadcasters made a few years ago. As Michael Berg noted in a TVNewsCheck article, "This service is a 2013 echo of the cable industry that began operations several decades ago. Originally known as CATV (community antenna television), cable, like Aereo, also retransmitted broadcast signals for profit without station permission or compensation."

These comparisons may make broadcasters' arguments seem a little weak. If those companies used the very same tactics 40 years ago, Aereo might argue, shouldn't it be able to do so today?

Aereo founder and CEO Chet Kanojia

Matt Polka, president of the American Cable Association, adds, "Despite their rhetoric, broadcasters don't want people to receive free TV. If companies like Aereo and other so-called disruptive technologies win, which we hope they do, all of that retrans revenue that broadcasters are basing their business plans on will crater. And for consumers, that's a good thing."

At least one cable operator has found a potential use for Aereo as an ally rather than an adversary. Time Warner Cable recently said it would suggest Aereo as an alternative to CBS in markets where it has blacked out CBS owned-and-operated stations. Whether that relationship lasts beyond the standoff, however, remains to be seen.

Aereo also faces challenges from other similar services, but none of them have achieved the geographical range or legal victories that Aereo has. Alki David's FilmOn (formerly Aereokiller) has been blocked by a federal judge pending a ruling over its legality at the end of August, and Ivi TV, another service that streams over-the-air TV signals to online subscribers, was shut down last year. Although Ivi TV has not been active since January 2013, David continues to launch his service, most recently in Seattle, despite the injunction against it.

Kanojia says the legal disputes with broadcasters are not even top-of-mind for him. "Building any startup company is very challenging… these challenges don't end. It's a continuous cycle." But, he added, "people like me thrive in this [environment]."

Just how much Aereo is thriving remains up for speculation. The streaming video provider has not released any user metrics and Kanojia will not comment on how many subscribers it counts, but analysts from companies that monitor and measure the online video space offer cautious commentary.

"We are not seeing them in our deployments [or seeing] any meaningful volume from them," says Gleb Brichko, director of marketing at Qwilt. Britchko brings up an important consideration: How broad will Aereo's reach need to be before it makes a clear impact on the cable and streaming video industry?

Dan Deeth, media and industry relations manager of Sandvine, says his company doesn't have any data on Aereo yet either but he is "expecting to have that data in our next Global Internet Phenomena due out in October."

Wherever Aereo goes from here, you can bet other players in the online video space--and probably those in the cable industry as well--will be watching its every move. --Mariko